EFTA01365338.pdf

3 December 2013 US Derivatives Spotlight F Figure 15: Call spread returns similar to calls (36M calls and spreads rolled after 24M)... 9% (Figure 16: ... but with much higher risk-adjusted returns j(36M calls and spreads rolled after 24M) 80% 8% I TE,,. 70% 7% -I 0 > o 60% a 6% 1 5096 cc5% i .8 It 40% 2 4% 4 C • 30% ct O 3% 2% -I -8 afr 20% I% • 10% 0% • 0% 1 1 Equity Outright: Spread: Spread: Outright: Spread: Equity Outright Spread: Spread: Outright Spread. ATM ATM- 6%ATM- 2% 10% 1096-2% ATM ATM - 696ATM - 2% 10% I 0% - 2% Sane' One., Mt Iloamlany finance LP Sant 0•400,ant iftenteg /*WW1. Figure 17: Call spread returns similar to calls (18M calls (Figure 18: ... but with much higher risk-adjusted returns and spreads rolled after 12M).- I 18k4 calls and spreads rolled after I2M1 9% 90% 1 2 8% -4 80% I 7% I: > 70% 1 E a u 6% -F., 60% 1 cc 13 596 ) 5096 i M 4% 3 : 'a 10:II•El c;320% 1% 0 III I . 1 Equity Outright Spread: Spread: Outrght: Spread: Equity Outfight: Spread: Spread: Outright: Spread: ATM ATM- 3%ATM - 1% 5% 5% - 1% ATM ATM- 3%ATM- 1% 6% 516- 1% Sane Destro Sr* Scambrog hew* 40 San Gosh* Sent Samba" Fare* IP Given the attractive levels of long-dated calls currently, investors may still want to stick with outright call options rather than spreads to maintain a higher delta. However, an alternative approach could be to scale up the call spread notional and have a similar delta exposure (at least initially) to an outright call. In Figure 19 and Figure 20, we look at the risk-adjusted returns for different call and call spread strategies after we scale up the call spread notionals. We assume that the investor trades an equivalent initial delta on the call spread as an outright call, which is then only rebalanced on the roll date of the long- dated call. For instance, if on trade date the 36M ATM call option has a delta of 0.50 and the 36M ATM-6% premia call spread has a delta of 0.20, we would buy 2.5x contracts of the call spread instead of each call contract. In the historical backtests, returns and risk-adjusted returns are both better for call-spreads after scaling to equivalent delta as the outright call. The higher delta notional does increase the volatility more than the return of the call- spread strategies and drives down the return/vol slightly from what's shown in Figure 16 and Figure 18. Page 10 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0056044 CONFIDENTIAL SDNY_GM_00202228 EFTA01365338